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Thread: Stockton CA City Hall Repo'd ... bankruptcy filing imminent

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    Default Stockton CA City Hall Repo'd ... bankruptcy filing imminent

    from

    (snip)"Add Stockton, California (population 292,000) to the list of cities bankrupted because of bad management and over-generous public union wages and benefits.

    Please consider New Stockton City Hall building seized by Wells Fargo; city preps bankruptcy contingency plan


    The Stockton City Council announced Wednesday that they will look at bankruptcy contingency plans after Wells Fargo seized the new city hall building.

    The city paid $35 million to buy the 8-story building, but was not able to move in because of its money problems, and recently stopped making debt payments all together. This is the fourth building that was repossessed by Wells Fargo; the bank seized three city parking garages for the same reason.

    At the June 5 Stockton City Council meeting, members will look at a contingency plan if mediation between the city and creditors failed, city spokesperson Connie Cochran said. For the past two months, the city, under AB 506, has been in a mediation process with creditors to come up with a payment plan in order to avoid bankruptcy.



    Incompetent City Management and Unions to Blame

    The firefighters' union put together a list of 10 wasteful things the city has done wrong totally about $116 million, including $48 million for the new city hall.

    $417 Million Healthcare Liability

    The union does not tell you that Stockton has a $417 million liability for its "pay-as-you go retiree health care system"

    And that's just healthcare. What about pensions and untenable salaries?

    So who is more to blame here?

    Bondholder Mediation

    Mediation with bondholders and unions is now underway, the outcome of which will determine whether or not the city files for bankruptcy.

    Recordnet reports Wealth of interest in Stockton mediation

    Wall Street lawyers are likely taking the hardest line in mediation with Stockton, waiting for the closed-door talks to play out with their arms folded, but seated at the table.

    "It's one thing to be forced by a court to give up your rights," said Matt Fabian, a bond analyst at Municipal Market Advisers in Connecticut. "It's another thing to give them up willingly."

    Stockton entered mediation March 27, and it agreed with its creditors and labor groups to continue until June 25. Mediation is the last-ditch effort to avoid bankruptcy.

    The conversation in mediation starts with Stockton's general fund deficit of $26 million, a fourth multimillion dollar shortfall year. The city must chip away at that figure with an eye on restructuring its obligations and forecasted deficits for years to come.

    These are Stockton's major obligations next year, absent any concessions:

    Bondholders will get $13 million, an amount that has increased 600 percent in four years. Payments have ballooned just like homeowners who took adjustable-rate mortgages;

    Stockton must fund its pay-as-you go retiree health care system at $9 million annually, something City Manager Bob Deis has compared to a Ponzi scheme. To begin funding this $417 million liability, the city would have to put aside $18 million next year;

    A few things are known about mediation. There are 18 parties involved, and they are represented by 100 attorneys and accountants combing Stockton's finances.

    They are the city's labor groups, retired city employees, CalPERS, Wall Street investors, Wells Fargo Bank and insurers responsible for paying bond holders if and when Stockton defaults.



    My Take?

    The best course of action for the city is to seek bankruptcy. The city is indeed clearly bankrupt so there is no point in delaying. Delays will only serve the bondholders at taxpayer expense.

    In bankruptcy court, the city should win the right to unilaterally modify the pension and healthcare agreements made with public union workers as well as terminate all collective bargaining rights. 50% or even 75% haircuts on pension and healthcare plans may be necessary. So be it.

    Bondholders must also take a hit. I suggest 100% on the new city hall (minus whatever it can recover from the seized building). Wells Fargo deserves to be punished for being stupid enough to lend Stockton money.

    Inquirung minds should also consider City Council of North Las Vegas Unanimously Suspends Collectively Bargaining of Public Unions, Citing Emergency Statutes.

    If Stockton files bankruptcy it will be the largest city in the US to seek Chapter 9 bankruptcy protection. Don't worry, that record will fall soon enough. LA and Oakland cannot be that far behind.

    Mike "Mish" Shedlock
    (snip)


    ... this should be interesting !!!

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    Default Re: Stockton CA City Hall Repo'd ... bankruptcy filing imminent

    The mediation with their creditors failed and they are filing for Chapter 9 today.There is a long line of other cities in similar straights. Can Illinois and California be far behind ?

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    Default Re: Stockton CA City Hall Repo'd ... bankruptcy filing imminent

    There appear to be some big General Obligation bonds that were used to guarantee what were really public/private partnership (PPP) developments. In other words, developers talked the city into issuing GO bonds to finance a marina and some hotels. The marina and hotels occupancy rates are not high enough to cover the debt service. Well, what happens then? Oh, the city's general fund is on the hook. OUCH! Dumb city manager, dumber city council for approving those deals.

    Add dumb guarantees to ridiculous salary, pension and health care benefits and you get an untenable situation. Obama care was promised to reign in health care costs. In fact, it has no such provisions. Unless the US Supreme Court strikes down the whole act, cities like Stockton and others have no end in sight to ever rising health care costs! Politics aside, the political leaders of Stockton and other cities and states have large employee bases to manage, including health care costs. They need health care cost controls as much, or perhaps more than the private sector. In my business, health care costs are expensive and I am getting annual double digit rate increases from BC/BS. Cities and states are no different.

    Z

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    Default Re: Stockton CA City Hall Repo'd ... bankruptcy filing imminent

    Stockton's unique in that it had the most generous healthcare plan anyone's ever heard of. After working for a single month in public employment and retiring, you and your spouse would get free health care benefits...for life. Let that sink in for a bit. Then, you think about the networks that run at the top and how people could take advantage of this... and you have another major liability. Add in the overly generous pensions, decreasing property taxes and increasing debt obligations... I don't know how they took so long to declare bankruptcy.

    Its a really sad town that completely overshot what it could be. Even during the boom years, nothing felt quite right about it.

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    Default Re: Stockton CA City Hall Repo'd ... bankruptcy filing imminent

    interesting twist ... from Wolf Richter at


    (snip)"The other day, we were doing one more time what on Sunday will become illegal in California: eating foie gras in a restaurant. Pan seared foie gras “traditionally raised in Sonoma, California,” served with poached local apricots. I’d go to jail for this willingly. We were sitting at the edge of San Francisco, looking at the Bay and the Bay Bridge draped across it, and we were talking—when we weren’t preoccupied by the divine, unctuous foie gras—about sweet corn and illegal immigrants.

    Foie gras is a dish the Greeks already enjoyed, and I don’t mean the austerity Greeks under Prime Minister Giorgios Papandreou, but the Greeks that fought off the Persians. And it’s one of the many paradoxes in California—a state that has absolutely everything except a decent government and a balanced budget. Lobbied by well-meaning people, I suppose, Republican Governor Arnold Schwarzenegger, in his infinite wisdom, signed a law in 2004 that made the sale and production of products derived from force-fed birds illegal. But he gave us some time to adjust to this harsh new life: the law wouldn’t take effect until July 1, 2012. OK, it’s banned in other countries too—Italy, the UK, and Germany for example—and Chicago experimented with a ban for a couple of years.

    Force-feeding hapless geese and ducks—gavage as it’s called—is certainly gruesome, but so is just about anything else that has to do with meat. Ever watch an orca hunt and eat a sea lion? It’s brutal out there, and the food chain knows no mercy and has no human sentiments. We use drones to bomb people in distant countries, but when it comes to the sensuous pleasure of two slices of foie gras, we get squeamish.

    A lugubrious moment: eating the final but to-die-for products of a mini-industry that had been exterminated by the government; and California still has double-digit unemployment. There were a number of us. The guy across from me was in charge of the wine. He knew his way around Bay Area vintners, was a farmer, and had a degree in economics.

    He was talking about sweet-corn and the harvest that had started some time ago. If you’re a city guy like me, listening to a farmer over superb wine and foie gras is fascinating. Sweet corn, the result of careful crossbreeding, is very fragile, he said. Unlike other varieties of corn, it has to be harvested by hand because machines damage it. And it has a short shelf life. To extend the shelf life—the secret to doing business with big customers like Costco and Safeway—you have to harvest it at night. If you cool sweet corn from 72° to 34°, it lasts a lot longer than if you have to cool it from 107° to 34°.

    One of the biggest challenges, he said, was lining up the farmworkers, 75 of them a day during harvest season. Subcontractors hired and took care of the workers, but every year it was getting more difficult. Most, if not all of them, were illegally in the country, he said. They worked from 7 PM till 3 AM under floodlights. It was piecework, averaging about $15 per hour. But with the crackdown on illegal immigrants, finding enough workers has become difficult, he said.

    “Can’t you hire some people from Oakland or Stockton who’ve been out of a job for years?” someone asked.

    “We tried, but man, no one wants to do this kind of work. It’s hard. After an hour, they give up ... if they even come out in the first place.”

    “But 15 bucks an hour, that’s pretty good, compared to minimum wage.”

    “They don’t have the skills, the stamina. You’ve got to be very productive to make this kind of money.”


    Pink clouds drifted across the evening sky. A group of girls rollerbladed by. Life was good.

    “And if the government ever gets rid of the illegals, or if they get scared and go back to Mexico on their own,” he said as he poured everyone some more wine, “we have to shut down our farm.”

    And that’s where we all had conflicted thoughts. We loved sweet corn and couldn’t envision summer without it—and whatever we thought about illegal immigrants, we did want to have our sweet corn.

    “Everyone who grows anything that has to be picked by hand,” he said, “has the same problem.”

    It didn’t take long for the conversation to link this issue to the demise of the California foie gras industry, and which government would be willing to kill yet another and this time much bigger industry"(snip)
    Last edited by Melonie; 07-01-2012 at 09:42 AM.

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    Default Re: Stockton CA City Hall Repo'd ... bankruptcy filing imminent

    There is a line of other cities just in California that will be filing or are seriously considering it. One of them is LOS ANGELES ! Not today, not tomorrow but possibly as soon as next year based on projected future budget deficits.

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    Default Re: Stockton CA City Hall Repo'd ... bankruptcy filing imminent

    This story is getting worse and worse. As noted in another thread, the bondholders are due for a major "haircut" to preserve pension benefits. Folks with a lot more knowledge and experience than me are unanimous that this will result in major increases in borrowing costs for almost every state , city and municipal corporation in this country. The possibility of a future bankruptcy where bondholders have to go to the middle of the line ( At Best ! ) is going to be factored into the interest rate that will have to be offered on future borrowings.

    Where the hell is Dum Dum Brown on this ? Doesn't he and his fellow Super- Majority Dems realize what this means ? How much more this will cost cities in California ?
    I know the unions don't give a damn but when did they ever care about state and local finances ? They've helped to roast many a "Golden Goose" all over this country.

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    Default Re: Stockton CA City Hall Repo'd ... bankruptcy filing imminent

    ^^^ actually, the Stockton CA bankruptcy is now ( or should I say again ... shades of the GM and Chrysler bankruptcies ) raising a HUGE question in regard to bondholder's 'rights' ...

    from


    (snip)"In his order this week allowing Stockton, Calif. to enter into bankruptcy proceedings, Judge Christopher Klein admitted he was heading into uncharted territory.

    The city’s biggest debt by far is the $900 million it owes CalPERS, the state-run pension system. Yet the city has refused to negotiate a reduction in what it owes CalPERS, even as it seeks significant haircuts from bondholders and other creditors who have lent the city another $700 million. Eventually, Klein said, he’ll have to “get down into the nitty-gritty of the CalPERS situation.”

    “And I, at this point, have no clue how that’s going to come out,” he said.

    Neither does anyone else. Stockton is just the latest example of what may become a wave of municipalities driven into bankruptcy by a combination of uncontrolled spending and shrinking tax revenue. Bankruptcy is a fairly straightforward proposition when a business goes belly up: A judge oversees the process of determining how much the debtor can pay and how much each creditor will be paid in the reorganization. Chapter 11 even contains a section specifically dealing with the treatment of pensions in bankruptcy.

    Municipal bankruptcies leave much more to the imagination. Congress didn’t specify how to handle pensions in Chapter 9 of the bankruptcy code, which was written specifically for municipal bankruptcies, but it did put severe constraints on judges in order to preserve the separation of powers doctrine. Unlike the almost God-like power of judges in business reorganizations, Chapter 9 judges can’t order cities to raise taxes, change their spending policies, or even prevent them from running up more debt.

    No court has resolved the central issue in the Stockton bankruptcy, which is whether the promises the city made to its employees and CalPERS rank above the contracts it made with the bondholders who lent it money. (snip)

    (snip)"Billions of dollars hang in the balance, both for bondholders and the companies like Assured Guaranty and MBIA that insure municipal bonds. The financial crisis transformed what historically had been regional patterns of default into a nationwide problem, said William Rizzo, managing director at MBIA’s National Public Finance Guarantee unit.

    “We’re certainly seeing stress across the country,” said Rizzo, whose company has issued guaranties on some $330 billion in muni debt. “The whole country’s feeling it.”(snip)

    (snip)"MBIA‘s lawyers argue Stockton has no viable way out of insolvency unless it addresses its pension debts. The city’s tentative plan would still have it racking up $100 million in operating deficits over the next 10 years and the CalPERS obligation would actually increase, said.

    “They can only impair me [ as a bondholder - sic ] if they show, after the plan is approved, it results in a financially feasible city,” Larose said.

    If Stockton fails to come up with a workable plan, Judge Klein has only one solution: Kick them out of bankruptcy court."(snip)



    The upshot in this matter is the legal question of whether or not ( present and future ) public employee pension obligations will be allowed to take precedence over bondholders' claims. If public employee pension payments are allowed to take precedence over bondholder repayments, not only could this trigger another AIG-like disaster via MBIA and other municipal bond insurers having to make good on near total losses, but it will also greatly increase future loss risk for any would-be buyers of future muni bonds. That greatly increased future loss risk will directly translate into demands for greatly increased interest payments on future muni bonds, which in turn will exacerbate the budget problems of every state and city that needs to 'roll over' existing muni bonds or issue new muni bonds.

    Some 'talking heads' are speculating that the future inability of states and cities to affordably borrow additional money, which in turn would force those states and cities to reduce their level of future spending to equal their actual level of future tax revenue collections, would be a 'good' thing. However, if the courts rule that pensions take precedence over all else, that could lead to very heated future conflicts ! At one extreme would be every available tax revenue dollar being directed toward pension obligations, with no money left for police, fire, or any other city services. At the other extreme would be draconian local income tax, sales tax, and/or property tax increases in an attempt to increase future tax revenues to the point of both being able to make good on pension obligations plus provide police, fire and other city services.
    Last edited by Melonie; 04-10-2013 at 01:44 PM.

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    Default Re: Stockton CA City Hall Repo'd ... bankruptcy filing imminent

    Weren't there bankrupt cities in Rhode Island where the pensioners had to share the pain ? I remember reading a "sob story" about just that in the N.Y. Times ( where else ? ) not too long ago.

    Plus the biggest reason NYC didn't go into Chapter 9 in the 70's was to protect the bondholders.

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    Default Re: Stockton CA City Hall Repo'd ... bankruptcy filing imminent

    ^^^ yes that was the case. But a lot has happened in the meantime. For starters, the US Supreme Court has since ruled that ( qualified ) retirement assets are 'safe' from confiscation during personal bankruptcies. Courts have also ruled that GM / Chrysler bondholders did NOT have 'first in line' status ahead of retirees after these corporations filed for bankruptcy. And of course, these days there is an assumed 'federal put' i.e. by one means or another the Federal Reserve / Federal treasury will make sure that state and local muni bonds of financially distressed states and cities will be bought at 'affordable' interest rates ( even if US federal taxpayers are forced to 'eat' losses on muni bond principal )

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    Default Re: Stockton CA City Hall Repo'd ... bankruptcy filing imminent

    You are almost losing me on this one. Just how much control does the Fed have over bond ratings ? Is the Fed buying state and municipal debt ?
    One of the few things I've given Obama credit for is when he told California to go fuck itself ( reportedly his and Rahm Emanuel's exact words ) when they came hat in hand to D.C. seeking a federal bailout. His record on state and municipal bailouts has been pretty good.
    Just how are Federal taxpayers subsidizing state and municipal debt ? By the triple tax free status of muni bonds or something else ?

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    Default Re: Stockton CA City Hall Repo'd ... bankruptcy filing imminent

    Just how much control does the Fed have over bond ratings ? Is the Fed buying state and municipal debt ?
    The theory follows along the lines of FNM and FRE. While there wasn't an explicit guarantee that the FED would buy suddenly risky FNM and FRE bonds at 'face value', indeed when the s#!t hit the fan the FED did precisely that. As a result US federal taxpayers were forced to eat losses on principal which resulted in the issuance of new US treasury bonds to cover the shortfall between 'face value' and market value of the risky bonds ( with a large number of those newly issued US treasury bonds being purchased via newly printed US dollars to boot ).

    Using the same sort of ( indirect ) mechanism for backstopping state and local muni bonds would effectively transfer loss risk from bankrupt city and state muni bond owners - with a significant number of said muni bond owners being 'rich' residents of high tax rate states - to US federal taxpayers via the FED, while at the same time allowing federal politicians to claim that they refused to ( directly ) bail out those states and cities ! With a 'guaranteed' buyer of last resort that doesn't have to directly account for loss of principal i.e. the FED, state and local muni bond ratings won't totally crash, future interest rates on newly issued state and local muni bonds won't rise to the stratosphere etc. But on the 'back end' any actual bond defaults / principal losses will have to be 'eaten' by US federal taxpayers via creation of additional US Treasury debt or creation of additional freshly printed US dollars, or both.
    Last edited by Melonie; 04-12-2013 at 11:39 AM.

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    Default Re: Stockton CA City Hall Repo'd ... bankruptcy filing imminent

    also, have a look at the latest federal budget proposal. It proposes the creation of a new class of federal taxpayer subsidized bonds for states and municipalities.




    (snip)"As presented by the White House, this all makes sense. The Treasury will pay out $53B, but the IRS will collect taxes from bond holders at the 28% rate and receive the $53B back in income taxes. Therefore there is no net cost (slide #1), at least that is how the information is presented.

    Who will buy the AFF bonds? All sorts of investors. Pension plans will love them. Folks with IRAs and 401Ks will lap them up, but by far, the biggest buyers will be foreigners.

    When the Treasury Department first introduced the concept of AFF bonds it described the potential investors as:

    AFF bonds would attract new sources of capital for infrastructure investment—including from public pension funds and foreign investors.

    The problem is that none of these buyers are paying US taxes. So very little of the tax revenue the White House is including in its analysis is going to be realized. AFFs are going to cost the [ US federal - sic ] taxpayers a bundle."(snip)


    And since the US Treasury = US federal income tax payers would be formally providing 28% of the interest payouts on this new class of taxable state / local muni bonds, federal 'guarantees' on the 72% state / local share would be more than just implied.
    Last edited by Melonie; 04-13-2013 at 12:51 AM.

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